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Tesla will be added to the S&P 500, officially becoming a blue-chip stock

Jen Wieczner
·4 min read

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Tesla is officially a blue-chip stock. The electric vehicle company will join the S&P 500, the premiere U.S. stock market index, the company overseeing the benchmark announced Monday.

The change will take place in a little more than a month, on Monday, Dec. 21. When the market opens that morning, the S&P 500 will include Tesla stock, a milestone for the automaker. Tesla surged past Toyota to become the world’s most valuable car company this summer—with a current market cap close to $270 billion—but until recently, its lack of consistent profitability barred it from the S&P 500, which requires a year’s worth of positive earnings for a company to be eligible.

That changed in late July when Tesla reported an unexpected second-quarter profit, its fourth in a row—clearing the final hurdle needed to join the S&P 500. While the index initially passed over the company during its September rebalancing—which some investors viewed as a snub—Tesla went on to turn another profit in the third quarter, reinforcing its case for S&P 500 inclusion.

Still, Tesla’s soaring market value—some $387 billion—would make it one of the S&P 500’s largest constituents, a size that threatens to tip the index lopsided. For that reason, S&P Dow Jones Indices, which oversees the index, is considering splitting the addition of the stock into two batches, which would begin before Dec. 21.

“Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date,” it said in the announcement.

The S&P 500 index includes 500 of the largest publicly traded American companies—from Apple to Berkshire Hathaway to Netflix—and is a popular choice for average investors, who buy exchange-traded funds (ETFs) that mirror the index, as well as a barometer for professional money managers, who measure their performance against the S&P 500.

That means the S&P 500’s addition of Tesla isn’t merely symbolic—it could have significant implications for investors, as ETFs and other portfolio managers purchase the stock to keep up with the index. Those purchases could help push Tesla’s stock price higher, as has happened historically when other companies have joined the S&P 500. Shares of Amazon rose 5% following the news that it would join the index in 2005; Bio-Rad Laboratories, one of the most recent companies added to the S&P 500, has risen 13% since its inclusion in June.

An S&P 500 stock bump is not a sure bet, though: Two other companies that joined the index in June, Teledyne Technologies and Tyler Technologies, have risen less than 3% each since then, less than the S&P 500 itself, which rose nearly 9% over the same period.

Still, Tesla stock jumped more than 10% in after-hours trading following the announcement Monday.

Tesla has been one of the best-performing stocks of 2020, leading some analysts to blame the S&P 500’s recent underperformance on the fact that it excludes the company: The Nasdaq Composite index, which includes Tesla, recovered its 2020 losses in early May and set a new high in June; it took the S&P 500 a month longer just to break even, and the index finally set a new high in August (which it has since exceeded). The same goes for investors who are more bearish on Tesla or queasy about its sky-high valuation: Once it’s in the S&P 500, they might want to buy the stock too, or risk falling behind.

In August, Tesla announced a stock split, so that current investors would receive five shares for every one they own, lowering the price of each individual share. The news sent the stock surging as investors believe that change, too, could spur more people to buy the stock, boosting the price further. If the bulls are right, many more investors will soon be Tesla shareholders.

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This story was originally featured on Fortune.com